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November 2021 | Buy-to-Let

Learning from the past

Richard Rowntree is managing director of mortgages, Paragon

Economists have warned of the risk of the UK entering a period of ‘stagflation’ for some time but the panic buying of fuel, soaring energy prices and supply shortages of essential everyday items have raised the profile of the issue amongst the media and general public.

The fear is that the price of labour and commodities will continue to increase as demand outstrips supply, squeezing already strained household budgets. 

This has led to comparisons with the 1970s, when attempts by policymakers to halt a recession were viewed as over stimulation of markets and blamed for destabilising prices and wages. 

This time around it is a little different because while ONS figures show that the furlough scheme has cost taxpayer £69bn, raising to £97bn when you include self-employed grants, it is likely to have suppressed unemployment and any deep scarring of the economy to some degree. 

Despite this, and with the Bank of England already accused by the House of Lords as being ‘addicted’ to printing money due to their £895bn quantitative easing programme, Governor Andrew Bailey seems keen to avoid making the same mistakes; it is very likely that by the time you read this, the first hike in a long time will have increased the base interest rate from the historically low 0.1%. 

Of course, any base rate increase would impact mortgage rates, something foretold by substantial rises in swap rates – the six-month low of 0.77% in August almost doubling to 1.36% at the time of writing.

This has led to questions about whether a rise in the cost of borrowing could cause some investors to exit the private rented sector. The result could be fewer properties available to let, which in turn, could reduce the affordability of rented property.

I don’t see this happening in any significant numbers, however, and it is important to look at the wider context. 

With the market starting cool after the highs of the Stamp Duty holiday, we’ve seen mortgage product availability return to pre-pandemic levels. Competition has driven down the cost of borrowing in many areas of the mortgage market with sub-1% rates in the mainstream residential market the result. The buy-to-let market hasn’t been far behind. 

This means that rates rise from an extremely low base. Unlike in the case of the stagflation we saw in the 70s, when interest rates climbed to double figures, we are unlikely to see rates rise to a point where those looking to modify their portfolios are priced out of the market. 

And while the cost of borrowing is undoubtably an important factor for investors, cheapest isn’t always best. This is particularly true in the specialist buy-to-let market where the added complexity of some cases requires more time and expertise.

Specialist buy-to-let lending is also subject to tighter regulation, with more stringent underwriting and generally lower loan-to-value lending, introduced after the global financial crisis, acting as protection for both consumers and lenders, as well as the wider economy. 

We also should recognise that many members of the increasingly professional landlord base will remember the economic shock of 2008 and be better prepared as a result. Landlord leveraging is lower than it was in the past and when we compare the proportion of mortgages more than three months in arrears across the buy-to-let and owner occupier tenures we consistently see far fewer, around half, of PRS investors failing to make regular repayments.

In part, this can be attributed to the strong and relatively stable demand for rented property that has been seen for decades, with evidence to suggest it will only grow further. Recent Paragon research has highlighted that the proportion of landlords reporting increasing tenant demand is at an all-time high. Alongside this, the proportion of landlords who said that they feel optimistic about a range of different PRS components continues to rise, exceeding pre-Brexit and pre-pandemic levels to hit a five-year high recently. 

Of course, this could change, but for me it suggests that those making a living from letting have learned from the past and are resisting making investment decisions based on conjecture alone.